Barry and Larry, who are brothers, are equal owners in Chickadee Corporation. On July 1, 2018, each loans the corporation $10,000 at an annual interest rate of 10%. Both shareholders are on the cash method of accounting, while Chickadee Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2019, Chickadee repays the loans of $20,000 together with the specified interest of $2,000. How much of the interest can Chickadee Corporation deduct in 2018?
A) $0
B) $500
C) $1,000
D) $2,000
E) None of the above

Question

Quizplus · Accepted Answer

Chickadee Corporation, using the accrual method, can only deduct interest that has accrued by the end of 2018. Since the loan was made on July 1, 2018, only 6 months of interest accrues by December 31, 2018. However, since the interest is paid in 2019, and the shareholders are on the cash method, Chickadee cannot deduct any interest in 2018.

Barry and Larry, Who Are Brothers, Are Equal Owners in Chickadee